A Snapshot of Financial Strength

While the income statement shows performance over time, the balance sheet gives you a snapshot of a company’s financial condition right now.

It answers:
What does the company own, what does it owe, and how much is left for shareholders?

The Three Key Sections

• Assets – What the company owns (cash, inventory, real estate, etc.)

• Liabilities – What the company owes (loans, accounts payable, upcoming bills)

• Equity – The value left for shareholders

Equity = Assets – Liabilities

The balance sheet is a simple equation with big implications.

Why It Matters

Debt Analysis

If liabilities—especially short-term ones—start piling up, that’s a red flag.

Example: A retailer with high short-term debt may struggle to pay suppliers or keep shelves stocked.

Growth vs. Risk

Debt can be used strategically—to fund R&D, enter new markets, or scale operations. But too much debt, too fast, leads to instability. Your job is to figure out which side of the line a company is on.

The Current Ratio: A Quick Health Check

Use this formula to assess short-term financial strength:

Current Ratio = Current Assets / Current Liabilities

How to Interpret It:

• 1.3 to 2.0 = Healthy, depending on the industry

• >2.0 = May indicate inefficient use of cash or inventory

• <1.0 = Possible liquidity crisis; company may struggle to pay near-term bills

A ratio of 1.5 means the company has $1.50 in assets for every $1 of short-term obligations.

Industry Context Matters

Always compare ratios within the same industry:

• Industrial companies often operate with lower current ratios due to capital-heavy operations

• Retailers usually have higher current ratios to cover inventory and cash flow cycles

Context is everything—what’s risky in one sector might be standard in another.

How to Access and Analyze Balance Sheets

Use free tools like:

• Yahoo Finance

• Morningstar

• SEC EDGAR (search for 10-Ks and 10-Qs)

Focus on:

• Debt Trends – Is total debt growing faster than revenue or earnings?

• Asset Quality – Are assets mostly liquid (cash, accounts receivable) or tied up in fixed property?

Case Study: Two Companies

Company A:

• Current Ratio: 0.8

• Rising debt

• Red flag—liquidity risk and potential solvency issues

Company B:

• Current Ratio: 1.8

• Stable, manageable debt

• Green light—healthy and balanced financials

A solid income statement can hide a weak balance sheet. Always check both.